The Real Effects of possible Stock Recalls on Acquirer Stocks: Empirical Evidence from M&A Premiums

Posted: 5 Jun 2018 Last revised: 4 Sep 2020

See all articles by Richard Schubert

Richard Schubert

Karlsruhe Institute of Technology - Institute for Finance; The University of Sydney Business School

Jan-Oliver Strych

Karlsruhe Institute of Technology - Institute for Finance

Date Written: July 26, 2018

Abstract

We apply the idea of Strych (2020) that short sellers of acquirers’ stocks infer from their private observations of stock recalls that the deal will be more likely terminated. To profit from such informational advantage through short selling, Strych (2020) expects that acquirers’ short sellers become merger arbitrageurs after deal announcement to obtain a trading option on acquirers’ stock recalls. The higher this trading option value, the more merger arbitrageurs are willing to pay for target shares than incumbent target shareholders require as premium from the acquirer. Anticipating this, we expect that acquirers reduce bid premiums accordingly. Consistently, in a sample of U.S. deal announcements from 2004 to 2017, we find that a one standard deviation increase of acquirers’ short interest (i.e., magnitude of merger arbitrage activity) and institutional ownership concentration (i.e., likelihood of an observable recall) is associated with a 10.53 percent decrease of the one-week premium. In addition, this premium reduction effect is accompanied with positive long-term buy-and-hold abnormal returns for acquirer stocks and tighter arbitrage spreads. As channel of the information about this premium reduction effect, we regard advice to acquirers by M&A advisors with high equity capital market expertise. As a result, M&A advisors add value to acquirers consistent with Dessaint, Eckbo, and Golubov (2019). Moreover, this effect is more pronounced for targets with low insider ownership and for acquirers with high active institutional ownership.

Keywords: Stock Recall, Short Selling, Blockholder, Takeovers, Mergers and Acquisitions

JEL Classification: G14, G23, G34

Suggested Citation

Schubert, Richard and Strych, Jan-Oliver, The Real Effects of possible Stock Recalls on Acquirer Stocks: Empirical Evidence from M&A Premiums (July 26, 2018). 31st Australasian Finance and Banking Conference 2018, Available at SSRN: https://ssrn.com/abstract=3190702 or http://dx.doi.org/10.2139/ssrn.3190702

Richard Schubert (Contact Author)

Karlsruhe Institute of Technology - Institute for Finance ( email )

Bluecherstrasse 17
Karlsruhe, Baden Wuerttemberg 76185
Germany
+4972160846033 (Phone)

HOME PAGE: http://finance.fbv.kit.edu/

The University of Sydney Business School ( email )

21-23 Codrington St, Darlington
H69 Codrington Building
Sydney, NSW 2008
Australia

HOME PAGE: http://https://sydney.edu.au/business/our-research/research-areas/finance.html

Jan-Oliver Strych

Karlsruhe Institute of Technology - Institute for Finance ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,205
PlumX Metrics